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The unified credit now exempts $5,250,000 from federal estate taxes, negating the need for creating tax planning on many estates. In addition, portability allows another $5,250,000 to be exempt, creating a pure exemption from federal estate taxes of $10,250,000 and scheduled to increase next year. Why do we need an insurance trust?

Some states do not follow the federal exemption and impose their own state estate tax. Some states have inheritance taxes, and some states have both. The estate tax is generally taxed where the decedent is domiciled at death. The inheritance tax is generally taxed where the inheritor resides and is based on their relationship with the individual.

States need revenue. Planning your domicile can save hundreds of thousands in taxes ... or you can set up an ILIT.

The state estate tax

Washington: Washington imposes a tax of 19 percent if the estate exceeds $2 million. The same $5,250,000 may have to pay Washington $617,500 even though the federal government receives zero.

Oregon and Minnesota: Oregon imposes a tax of 16 percent but only exempts $1 million. The same $5,250,000 may have to pay $680,000 in taxes.

New York and Massachusetts: One million dollars is exempt on $5,250,000; the tax is 680,000 at a 16 percent rate.

Vermont, Maine, Rhode Island, and Connecticut: These states all have various exemptions, from a low of $910,725 (Rhode Island) to a high of $2,750,000 (Vermont). The rates also vary from 12 percent to 16 percent.

Hawaii and Delaware: These states exempt $5,250,000 and then tax at 16 percent.

Inheritance taxes

Iowa, Nebraska, Kentucky, Pennsylvania, and Tennessee: All these states impose inheritance taxes from 9.5 percent to 18 percent. Potentially, the tax is $787,500 on $5,250,000. Iowa and Pennsylvania have no exemption (the least), and Tennessee has $1,250,000 (the most).

New Jersey and Maryland: Try not to die in New Jersey or Maryland, or at least check your domicile. New Jersey exempts only $675,000 and taxes at 16 percent. On the $5,250,000 you may pay $732,000.

Bottom line

Check your state inheritance tax and estate tax. Check the domicile of the client. In some states, an ILIT may be a tool to protect against the state estate tax.

IRS Circular 230 Disclaimer: To ensure compliance with IRS Circular 230, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

About the Author

Adjunct Professor, Graduate Tax Program, Northeastern University
MBA University of South Florida 1979
J.D. University of Miami 1983
LL.M Tax University of Denver 1984
Licensed before U.S. Tax Court, 11th Circuit Court of Appeals, 9th Circuit Court of Appeals and U.S. Supreme Court.
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